- BURS ordered to return the P3.9m
- The ruling will affect the entire banking sector
JONATHAN HORE
The Court of Appeal has ordered Botswana Unified Revenue Service (BURS) to return to Bank Gaborone P3 890 964.49 in Value Added Tax (VAT) paid by the bank after a BURS audit on its VAT matters in 2014.
The contention between the bank and the taxman centred on whether or not the supply of vehicles by the bank under its installment credit arrangements was subject to VAT. The bank argued that such sales were indeed finance leases subject to VAT but the taxman was of the view that the bank supplied loans on which it earned interest, which is exempt from VAT. Ruling in favour of the bank on 26 August, the Court of Appeal’s three judges held that “a contract cannot at the same time be a sale and a loan”.
This is the first case in Botswana dealing with VAT on asset financing (finance leases) and that undoubtedly makes it a critical precedent.
The gravity of the matter
This issue of contention in the case is of paramount importance to the banking sector as it impacts VAT that they can claim when they purchase inputs for their business. As such, VAT claims are dependent on a ratio made up of sales subject to VAT as a proportion of total sales, which means a summation of taxable sales and exempt sales. This ratio is commonly known as the VAT apportionment ratio in VAT lingo. The ratio also determines VAT expenses borne by banks when they import services from non-residents such as management and consultancy fees. VAT is therefore determined by reference to the VAT apportionment ratio. VAT expenses in usually run into millions of dollars even for a single bank.
The finance leases
The judgment of the Court of Appeal came after BURS assessed the P3.9 million arguing that the bank had underpaid its VAT between 2011 and 2012 due to the perceived mistreatment of the vehicle finance leases. Aggrieved by the assessment, the bank appealed to the Board of Adjudicators, a tax court set-up by the Ministry of Finance and Economic Development to expedite resolution of tax disputes.
The case reveals that the bank’s modus operandi in respect of such sales is that upon receiving a request for financing from clients, it purchases the vehicles chosen by the clients from car dealers, claiming VAT that is charged. The bank immediately sells the vehicles to the clients at the same price, charging VAT and adding loan arrangement fees plus interest. The bank, however, does not put a mark-up on the price of the vehicles, which makes the VAT incurred similar to the VAT it charges on the vehicles. The bank makes these sales under what it refers to as installment sale agreements.
Technically, the bank therefore sells vehicles as is acceptable practice in the banking industry. However, BURS was of the view that the bank simply provided loans on which it earned interest and as a result, it incorrectly calculated its VAT apportionment ratio by including the financed vehicle sales as subject to VAT. It therefore raised VAT assessments, which aggrieved the bank.
Courts’ views
The Board of Adjudicators decided on whether or not the bank’s sale arrangements were “finance leases” subject to VAT. In the event, it ruled that they were not, thereby agreeing with BURS’ arguments that the bank had underpaid VAT. The Board of Adjudicators even questioned whether banks could deal in vehicles in terms of the Banking Act. The High Court also upheld the Board of Adjudicators’ findings, ruling that the P3.9m was due to BURS.
However, the Court of Appeal stated that both the Board of Adjudicators and High the Court had misdirected themselves by considering whether the vehicle sales qualified as “finance lease” sales for VAT instead of considering whether the bank’s standard installment agreement was “a taxable supply” or an “exempt supply.”
Further, the Court of Appeal observed that the High Court was not correct to hold that since the bank did not add value to the price of vehicles, the arrangement could not be held to be subject to VAT, a tax which requires that value be added. BURS was also faulted for contending that since the vehicles were immediately sold to the bank’s clients on purchase, the bank at no time owned the assets and therefore it did not make sales but merely provided finance.
The Court of Appeal ended up holding that the bank’s arrangements were actually “hire purchase agreements” subject to VAT.
Landmark decision
This decision is of critical importance to the banking sector and the tax fraternity as it clears the air over the treatment of installment sales agreements, a well-established practice among banks that in practice has always been subjected to VAT. Further, it makes it certain that banks can include asset sales in the determination of their VAT apportionment ratio. This brings clarity as to what affects the said ratio, which is so critical in accounting for the VAT for banks, considering the magnitude of the amounts involved in such transactions.
Technicalities
However, while the Court of Appeal held that the bank’s installment sales agreements were correctly subject to VAT on the basis that they are “hire purchase agreements,” it would appear that the bank’s installment arrangements were in fact “finance leases.” The Board of Adjudicators and the High Court dealt at length with whether the sales were in fact finance leases. This is so as such arrangements are internationally and per the VAT Act referred to as finance leases.
Regardless of the technicalities mentioned, the critical issue is that the installment sales agreements by banks have always been subject to VAT, which was confirmed by the Court of Appeal. The issue of whether they are hire purchase agreements or finance leases does not change the VAT treatment of such sales agreements.
This Court of Appeal ruling comes with much relief to the banking sector which has under scrutiny by the taxman.
NB: Jonathan Hore is Managing Consultant at Tax advisory firm, Aupracon Tax.